Our Crisis of Confidence

I think what we're going through right now is a classic crisis of confidence in the financial markets.

It's not so much that there are problems out there that people don't recognize that are coming as a surprise. I think the real problem is that, as people look at the problems, they say, "Whoa, there's nobody who can fix this, the solutions are too hard, I just don't see any way out of this."

If you look at Greece and the Euro debt problem, you go OK, so how does this all get resolved? How does it get resolved without taking Italy down? How do we support Greece, whenevery time we do an austerity cut in the Greek budget it makes the economy slow down, which does a bit of bigger budget hole, so that's not going to work.

We have to wonder whether the Germans are going to continue to support the European Central Bank's intervention in the Italian bond market, so part of the problem is if you look at that situation you don't see a solution. You don't have any faith in the actors, the institutions, to solve the problem.

Go to the US and you've got the same situation. OK, we've got unemployment over 9%, and it's forecast to stay over 9% for a long time.maybe if we're really lucky it will get down to 8.5%, which is still horrible, in 2012 or 2013.

So how do we fix this? You look around and not only don't we have any agreement on how to fix it between Republicans and Democrats, or between liberal economists and conservative economists, or between Keynesian and Hayekians. Not only don't we have any agreement about how to fix this, we don't have any political ability to move it even if we did have some kind of agreement.

Basically, the Republicans and the Democrats are at such loggerheads that they're not going to reach any kind of compromise because they're looking forward to the 2012 election. Both parties figure that it's better to run an opposition to the other party than to run as somebody who's actually done something.

So you look at this problem and you see the US economy is slowing, the Fed can do all of the quantitative easing that it wants, but it's not going to move the fiscal budget at all, and that's what you really need to get some kind of growth going. Again, a problem without a solution, where the players don't have the confidence of anybody in the market. This is the basic problem we've got right now.

That's if you look around. It's not so much that the problems are so huge, so terrible-although they are in some cases huge. The problem really is that nobody has any confidence that anybody has got a solution to these, and the expectation is they will just drag on and on and on, getting steadily worse and worse and worse until something blows up.

As you can imagine, that's not exactly a formula for higher stock prices.